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Tuesday, July 24, 2012

Nearly investor has heard about the patent cliff facing the major pharmaceutical companies. But there is another, quiet revolution occurring in the pharmaceutical sector right which very well may change its current business model drastically. That revolution is 'personalized medicine'.

Personalized medicine is the result of advances in genetics and molecular biology. While still in its early stages, it promises improvements in patients' treatment while at the same time reducing healthcare expenditures. It does so through molecular biology and the use of diagnostic tools, which is pivotal to determine whether an individual patient will benefit from a particular drug used to treat a specific disease such as cancer.

A recent advance in personalized medicine happened when the U.S. Food and Drug Administration approved a test called Therascreen from Qiagen NV (Nasdaq: QGEN) that will be used in conjunction with the drug Erbitux (used for colorectal cancer) that is owned by Eli Lilly (NYSE: LLY) and Bristol-Myers Squibb (NYSE: BMY). The test will allow the two companies to identify the 60 percent of patients who do not have a mutation in the KRAS gene and will benefit from the drug, thus avoiding giving the drug to patients who do have the mutation and will not benefit.

Based on history, this should be a big boost for sales of Erbitux. AstraZeneca's lung cancer drug Iressa, launched in 2002, had little success because of its high failure rate. But after a diagnostic test was developed in 2009, sales began to grow as the 10 percent of patients (with an EGFR mutation) helped by the drug were identified.

The okay for Therascreen is a milestone since the FDA has only approved a handful of drugs with companion tests over the past decade. Perhaps best known is Herceptin from Roche ADR (NASDAQOTH: RHHBY), which is given to the quarter of women with breast cancer that have a so-called over-expression of the Her2 gene. The diagnostic test is a joint venture of Genentech, now owned by Roche, and the Danish diagnostics company Dako which is now owned by Agilent Technologies (NYSE: A). Agilent bought Dako in June for $2.2 billion in cash from the Swedish private equity firm EQT.

The recent FDA approval underscores the growing importance of 'companion diagnostics' – used to analyze a patient's genetics – to determine whether that patient will benefit from a specific drug. This may change pharmaceutical companies entire business model to include companion diagnostics with all of their major drugs on the market. For example, Roche says that 60 percent of the drugs in its current pipeline are linked to a companion diagnostic.

Think about it...in the future, such diagnostic testing will nearly eliminate failure of drugs to work in certain patients and those costly side effects will be avoided because drugs will only be given to patients where the genetics have been determined to be compatible with the drug.

Even though some drug companies are keeping the companion diagnostics in house, the advancement of personalized medicine is potentially great news for companies in the diagnostics business such as Agilent Technologies, which is expanding its life sciences business into a fourth division at the firm, and Qiagen, which already manufactures 30 companion diagnostic tests.

Double-digit growth is forecast for this sector through 2015 and beyond, pushed along by a number of factors including treatment cost savings, optimization of therapies and drug safety. Personalized medicines for cancer are already dominating the market, accounting for more than half of all the personalized medicines currently. But with personalized medicines quickly expanding into other areas such as HIV as well as cardiovascular and neurological disorders, investors in the healthcare sector would do well by keeping stocks like Qiagen and Agilent on their radar screens.

This article was originally written for the Motley Fool Blog Network. Make sure to read my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/.

Thursday, July 19, 2012

One of the companies that is often pointed to in the technology sector as a bellwether as the world's top chip equipment maker is the Dutch company, ASML Holding NV ADR (Nasdaq: ASML). It not long ago gave a rather upbeat forward assessment of its business (thanks to smartphones and tablets) and now more good news is flowing for ASML shareholders.

The world's biggest semiconductor manufacturer Intel (Nasdaq: INTC), and one of ASML's largest customers, agreed to invest $4.1 billion into the company. Intel is putting $1 billion towards ASML's research and development costs as well as buying a 15 percent stake in the company for $3.1 billion.

Intel's major investment into ASML may soon be followed up by other sizable investments from other of the company's major customers. These customers include Taiwan Semiconductor Manufacturing ADR (NYSE: TSM) and Korea's Samsung Electronics Co. Ltd. (NASDAQOTH: SSNLF.PK). It has been reported that ASML has asked its three biggest customers, accounting for 41 percent of its revenues, to help fund its R&D in exchange for up to 25 percent of the company.

Why would these three semiconductor companies be so anxious to help out ASML? Because they are very concerned about maintaining the progress in chip miniaturization over the coming years.

In particular, the money from Intel, Samsung and TSM will help ASML accelerate the development of the next step beyond laser technology, extreme-ultraviolet (EUV) lithography. This is a new process that is seen as key to producing smaller chips. It requires a vacuum inside the machine and mirrors instead of lenses to focus the light on the silicon. ASML is seen as the leader in the field and it believes that the new technology will be able to be used for mass production of chips below 20 nanometers beginning in early 2013. The research money should allow it to break the 10 nanometer barrier later this decade.

In addition, the money injections will be used to help with the development of equipment that can handle larger-sized circular wafers from which chips are cut. The next generation 450 millimeter diameter wafers will contain roughly double the amount of chips as existing 300 millimeter wafers. Development of this technology should result in cost savings for chip makers of 30-40 percent.

From ASML's viewpoint, these investments will be key to it remaining number one in semiconductor equipment and ahead of its Japanese rival Nikon Corporation ADR (NASDAQOTH: NINOY.PK). That company is also working on EUV lithography technology and has ASML a bit worried. But the good news here is that it is believed Nikon is at least two years behind ASML in developing EUV technology with its version of EUV technology not coming onstream until at least 2015. And this cash injection by Intel and the other major chip makers into ASML is sure to put Nikon even more behind the proverbial eight ball.

This development and advancement in chip manufacturing technology bodes well long-term for users of tech gadgets such as smartphones and tablets too since production costs for such gadgets will be much lower. Nomura's global technology specialist, Richard Windsor, even told Reuters that “We're talking about $50 tablets”.

But the real winner here is ASML and its shareholders as it has basically cemented its place as the number one semiconductor equipment for the next decade.

Monday, July 16, 2012

The struggle at the top of the technology food chain between tech titans Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG) continues. Now the growing conflict has even spread to the world to smartphone map applications with the unveiling last month of a home grown Maps application from Apple. This is a straight on in-your-face effort to beat Google on its own home turf.

This move in essence ousted the Google Maps app that had come preloaded on the iPhone since its launch in 2007. Apple's version of Maps will come with local reviews from Yelp, 3D images of cities and turn-by-turn navigation.

What is interesting here is that this struggle over smartphone map apps is extending half way around the world to China. Here, of course, only Chinese companies are licensed to collect map survey data. So both Google and Apple have to work with local partners.

The two big players in this field in China are AutoNavi Holdings Limited (Nasdaq: AMAP) and NavInfo. Shenzhen-listed NavInfo works with major companies in China including Samsung,Nokia, Motorola and Baidu, but it is AutoNavi which has landed the really big fish in China. Apple recently selected AutoNavi as its partner for maps on its future versions of the iPhone and iPad in China. This is an intriguing choice since AutoNavi is already the partner for Google in China and has been since 2006.

This recent decision by Apple may change the battle for market share in China between AutoNavi and NavInfo in AutoNavi's favor. The latest data showed that AutoNavi had 52 million users for its mobile maps app at end of March 2012 while NavInfo had their maps app installed on more than 37 million handsets at the end of 2011.

Both companies started out with car navigation products. The main difference today is that AutoNavi is diversifying more quickly into technology for consumer devices more quickly than NavInfo which continues to be mainly focused on its auto division. This makes some sense since some of its mobile partners like Nokia are not doing so well.

NavInfo and Toyoya Motor ADR (NYSE: TM) recently formed a joint venture in China for the distribution of map data to car navigation systems in China and is scheduled to start services in 2013. Toyota will have a 39 percent stake in the venture. The joint venture combines Toyota's telematics technology with NavInfo's map production and management technology. Toyota and NavInfo's parent have cooperated on map data creation for car navigation systems since 1996.

Apple's move away from Google maps in China will hurt Google's mobile advertising sales. About a third of Google map users in China access the service via an iPhone, says Analysys International. This is important because mobile e-business in China is a growth industry. Mobile e-commerce is expected to generate $48 billion of transactions annually by 2015 in China, growing 26 times from 2011 levels. Mobile marketing itself will jump 10-fold by 2015 to about $3.85 billion. All of these figures come from iResearch.

What is important here is that for both mobile marketing and mobile e-commerce, about 20 percent of all transactions will rely on location-based technology like maps,matching merchants with consumers based on their specific location. Apple's move away from Google Maps in the burgeoning consumer market of China will obviously hurt Google.

The Chinese maps app battle looks to be just the latest conflict between the two giants. And it's one that Apple appears to be be winning for now. But the war between the two is far from over.

This article was originally written for then Motley Fool Blog Network. Make sure to read my daily market articles for the Motley Fool at http://blogs.fool.com/tdalmoe/.

Tuesday, July 10, 2012

The past several weeks has seen a continuing convergence between hardware and software and a ratcheting up of the competitive fires between tech giants Amazon (Nasdaq: AMZN), Apple (Nasdaq: AAPL), Google (Nasdaq: GOOG) and Microsoft (Nasdaq: MSFT) with the unveiling of new devices from both Google and Microsoft.

In actuality, the latest product unveilings indicate that companies like Google and Microsoft seem to be adopting Apple's corporate strategy. That approach involves integrated hardware and content. And it is a successful one...Apple dominates the tablet market with a two-thirds market share.

Google launched two new products – a new 7-inch tablet computer and a living-room media streaming device (Nexus Q) which runs on the latest version of its Android software, Jelly Bean. This version of Android, by the way, will offer voice search capabilities similar to Apple's Siri virtual assistant.

The Nexus 7 tablet is priced at only $199, undercutting the $399 price of Apple's entry-level iPad by a good margin. And on the content side, where Google trails Apple and Amazon, the company announced new TV and movie deals with content providers such as Disney and NBCUniversal and publishers like Hearst. Both devices also integrate the company's social network, Google+ while the Google Now feature offers live sports and traffic information based on users location.

The week prior to the launch of Google's tablet Microsoft showed off its entry into the tablet market, the Surface, which has a 10.6 inch screen. It also has a stand, two cameras and a built-in touch keyboard. The main difference between the Surface and other tablet offerings is that it will offer users an experience more akin to a laptop PC.

Microsoft will offer two versions of Surface. The more expensive version will run on Windows 8 (due out in the fall) and uses a new Intel Core processor. A lower priced version features Windows RT and runs on an ARM processor that is found in most tablets. The company has yet to reveal at what price the two versions of Surface will sell for.

Of course, Amazon is not standing idly by. The company also offers a $199 tablet based on the Android operating system. And it recently announced that, for the first time ever, it is recruiting app developers as the company prepares to roll out its smartphone and tablet (including the Kindle Fire) platforms later this year in Europe.

So can any of the new devices challenge Apple's supremacy in tablets? Of course, they can. The tech world is constantly in a state of flux. But there is one key to doing that.....

That key has to be the thousands of independent software applications developers. Without content and apps, rivals to Apple (the iPad offers more than 225,000 apps) have little chance to compete. Can Microsoft and others entice app developers into writing apps to be downloaded to their devices? Google has a decent job so far with thousands of apps available and with 20 billion downloads. Now it remains to be seen if Microsoft can get developers to come up with apps for the Surface.

This article was originally written for the Motley Fool Blog Network. make sure to read my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/.

Thursday, July 5, 2012

Stock market investors are betting on central banks like the Federal Reserve sparking the global economy back to robust health through monetary policy. However, with interest rates already at zero for all practical purposes, the main weapon remaining in the Fed's arsenal is money printing through quantitative easing and other measures. And the effects of that medicine seems be less and less with every dose given.

But investors should not despair...right now, there is another force at work stimulating economic growth around the globe. What is it? Lower oil prices!

Since March alone, oil prices have declined by more than 30 percent, leaving consumers more spending power. The global benchmark for oil, Brent crude, has tumbled to its lowest level in over 18 months and is now trading below $90 a barrel. Quite a drop from its peak earlier this year at $128.40 per barrel. And that is thanks largely to Saudi Arabia boosting production earlier this year to a 30-year high in effort to help the global economy.

The drop in crude oil prices is a definite negative for investors in the oil patch though. Take a look at three of the large international oil companies – ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX) and BP PLC ADR (NYSE: BP). The stock prices of both Exxon and Chevron have fallen by about 5 percent while BP has tumbled by a double-digit percentage so far in 2012. And their share price is unlikely to rebound strongly in the near future.

The reason? Lower oil and gas prices means lower earnings for these companies. According to FactSet, ExxonMobil is expected to earn $8.09 a share in 2012 versus $8.37 in 2011, Chevron is forecast to earn $12.98 per share in 2012 against $13.28 in 2011, and BP is predicted to earn $6.26 per share in 2012 compared to $6.89 in 2011.

So oil companies look to be losers in 2012 thanks to low oil prices. But there will be winners too. These are the big oil consuming industries such as airline and trucking companies. There is some evidence already that, for example, airlines are benefiting. The airline industry trade group IATA (International Air Transport Association) has hinted that the drop in jet fuel costs has already saved airlines nearly $20 billion (out of a forecast annual $207 billion price tag) in their costs. More evidence of lower oil prices being a boost to earnings in these sectors may become apparent when these firms start reporting results from the April-June quarter in the weeks ahead.

The interesting thing occurring right now in the oil market, which is both good but scary, is the lack of hedging by large oil users like airlines despite the 30 percent drop in oil prices. One would think major users would want to lock in these lower prices. But they are not at the moment.

The chief financial officer at Southwest Airlines (NYSE: LUV) said earlier this year that the company's hedge protection for the second quarter of 2012 was “minimal”. And according to the Financial Times, an executive vice-president at FedEx. Michael Glenn, stated last week that “lower fuel prices will help [his company]”.

But the scary part is that this lack of hedging is eerily reminiscent of 2008 when these companies did not hedge their fuel costs in anticipation of even lower oil prices thanks to growing economic weakness around the globe. They are apparently betting on further economic weakness coming out of Europe and China, the main engine of oil demand.

But the oil price weakness scenario could change rather quickly. Current oil prices are now below what could be called the comfort threshold for most OPEC countries including Saudi Arabia. These countries' budgets have ballooned in the past few years as they have spent on improving their citizens' daily lives because of the fear of widespread unrest as the Arab Spring moves from country to country in that part of the world. It is believed that Saudi Arabia, for example, now needs Brent crude oil to be at around $90 a barrel in order to pay for all the domestic programs they have initiated.

So investors and hedgers should not be surprised if it soon throttles back on oil production. Hopefully, airlines and other big oil consumers will have hedged their exposure to higher prices by then.

This article was originally written for the Motley Fool Blog Network. make sure read all of my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/.

Monday, July 2, 2012

Traders buying Facebook (Nasdaq: FB) looking for a quick pop have certainly been disappointed. But what about longer-term investors? Is Facebook a company worth owning? The answer to that may lie in whether the company is able to come up with a mobile strategy.

On the surface, Facebook looks like a web powerhouse, with hundreds of thousands of apps and sites building on its social network site. But in the mobile world, it looks like just another applications developer. And one that, like others, is dependent on platforms owned by Apple or Google for distribution. Facebook management has recognized this and has made some moves including a series of acquisitions and a new app store as part of its attempt to adapt to the mobile device world we live in.

Data from research firm Gartner reinforces the idea that Facebook had better adapt and quickly if it is to be a profitable company. It estimates that revenue from non-mobile social media will climb to $10.2 billion in 2015 from the $1.3 billion level in 2010. But mobile social media revenue is forecast to rise to $29.1 billion in 2015 from $7.3 billion in 2010.

Clearly mobile social media is a sector in which Facebook has to become a major player. Facebook itself admitted before the IPO that growth in advertising sales isn't keeping pace with the gains in the number of users, many of which are logging on via mobile devices. Facebook sent more than 160 million visitors to mobile apps in April 2012 alone! This is a colossal opportunity for the company and it has to simply find a way to monetize those visitors.

One way Facebook can try to catch up fast in the mobile world is through acquisitions of companies rooted in mobile technology. It has already acquired mobile tech companies Tagtile and Glancee, not to mention Facebook's $1 billion offer for Instagram.

But of course, Facebook has to acquire the 'right' type of mobile technology companies from the myriad of choices out there. Many of these companies use the old-fashioned method of throwing a bunch of stuff against the wall and seeing what sticks. Mobile gaming companies, like Zynga (Nasdaq: ZNGA) and Glu Mobile (Nasdaq: GLUU) use that strategy. Zynga, with more than 290 million active users, spent over $56 million in the first quarter acquiring new users.

Glu Mobile is a leading global developer and publisher of “freemium” games for smartphones and tablets. Some of its most popular games are available now at the new Facebook App Center. It is well positioned in a market forecast to grow to $16 billion by 2015. But it still follows the strategy of building and hoping. Also think of the creator of the highly successful Angry Birds game, Rovio Entertainment. It was another 'build it and they will come' company that had a lot of losers before hitting upon Angry Birds.

It should be mentioned though that Zynga to date has been successful, providing Facebook with many of its most popular games including Farmville and CityVille. In fact, Zynga supplied Facebook with 12 percent of its revenues in 2011, its largest source of income.

Perhaps Facebook could look at mobile technology companies that are approaching the sector from a different angle using predictive analytics. That is finding a particular target audience, such as fans of a particular sports team, and building apps specifically for them.

One company doing that is a small company called Bitzio (BTZO.OB) which has already surpassed the 40 million app download mark. Its entire strategy is centered around licensing media rights of sports and entertainment properties with millions of existing fans and then creating apps and web experiences for these fans. To execute its strategy, Bitzio recently acquired an award-winning animation studio and a mobile games developer. A caveat here...this is a small company, trading below $1 a share, so investors are urged to do their due diligence.

Getting back to Facebook, making Facebook-friendly mobile apps could become even easier if the company decides to develop its own operating system as Apple and Google have done. Rumors of a “Facebook Phone” have been circulating for two years with even more recent rumors of Facebook buying Research in Motion. But obviously such undertakings would be risky for Facebook, especially considering its loss-making mobile business.

Or perhaps Facebook could look at payments as a solution to its mobile revenue problem. Some app developers have already told Facebook they would like to use its Credits virtual currency on mobile also. But Apple's App Store expressly forbids developers from using any other payment system than its own. And Google is not likely to be happy if Facebook moves to oust its payment system from Android applications.

So Facebook is left with a dilemma as to how to prosper in an increasingly mobile world. It's a problem the management needs to solve if the company is to survive and grow profitably in the years ahead.

This aericle was originally written for the Motley Fool Blog Network. Check out my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/.

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About Me

Nearly three decades of experience in the investment industry. Spent 18 years with Charles Schwab, as a representative and trading supervisor, with both Series 7 and Series 8 licenses.
After leaving Schwab, began to write freelance article on the markets and investing.
Currently write articles for the newly launched Motley Fool Blog Network website - http://blogs.fool.com/tdalmoe/
I am also a premium contributor to the seeking Alpha website - http://seekingalpha.com/author/tony-daltorio